QUESTION 1

MONTHLY Expected Returns, Standard Deviations, and Correlations (1975-2014, 480 months), Portfolios are Top or Bottom Decile in Size or Book-to-Market Ratio
			Correlation with:
Asset Class	Expected Return	Std. Deviation	Large Stocks	Small Stocks	Value Stocks	Growth Stocks	Gold
Large Stocks	1.01%	4.30%	1.00	0.65	0.75	0.93	-0.01
Small Stocks	1.35%	6.10%	0.65	1.00	0.75	0.69	0.07
Value Stocks	1.51%	5.94%	0.75	0.75	1.00	0.65	0.01
Growth Stocks	0.95%	5.13%	0.93	0.69	0.65	1.00	0.00
Gold	0.54%	5.66%	-0.01	0.07	0.01	0.00	1.00

1. Suppose you CAN short assets at no extra cost (so weights can be negative).

A. Find the portfolio that maximizes expected return if you want the same risk of LARGE stocks. What are the portfolio weights?

B. Which asset do you SHORT in this portfolio? What asset has the biggest increase in portfolio weight from the CANNOT short to CAN short examples? Why?

C. Consider the portfolios you found that maximize expected returns subject to having the same risk as LARGE stocks. What is the benefit in terms of expected returns, in being able to SHORT assets vs. not being able to SHORT assets? Given this benefit, is allowing the investor to SHORT important in this example?